25 May 2010

PP 7767/09/2010(025354)
Malaysia Corporate Highlights
RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

B r ief ing Not e

25 May 2010
MARKET DATELINE

WCT Share Price

Fair Value
:
:
RM2.55
RM2.10
No Further Provision For Bakun Recom : Underperform
(Maintained)

Table 1 : Investment Statistics (WCT; Code: 9679) Bloomberg: WCT MK

Net FD Net
FYE Turnover Profit# EPS# Growth PER EPS# C.EPS P/CF P/NTA ROE Gearing GDY
Dec (RMm) (RMm) (sen) (%) (x) (sen) (sen) (x) (x) (%) (%) (%)
2009 4,666.6 147.1 18.8 43.5 13.6 - - 9.2 1.5 11.5 0.2 3.9
2010f 2,436.2 140.6 18.2 (3.0) 14.0 17.5 20.0 20.1 1.4 10.2 0.5 2.4
2011f 2,020.9 130.7 16.9 (7.0) 15.1 16.4 22.0 22.8 1.3 8.8 0.5 2.4
2012f 1,747.5 134.2 17.4 2.6 14.7 16.8 22.0 22.3 1.2 8.5 0.4 2.4
Main Market Listing /Trustee Stock/Syariah Approved Stock By The SC #Excluding EI * Consensus Based On IBES

♦ No further provision for Bakun. WCT does not see the need to make Issued Capital (m shares) 781.7
further provision for cost-overrun from the Bakun project. It is believed Market Cap(RMm) 1,993.4
that the additional RM450m provided by lead consortium member Sime Daily Trading Vol (m shs) 2.5
52wk Price Range (RM) 1.79-3.06
Darby was to cover “costs sitting in Sime Darby’s books that it was unable
Major Shareholders: (%)
to charge to the consortium” and not additional cost-overrun at the
EPF 21.9
consortium level. As such, there is no need for WCT, who owns a 7.7%
Taing KH & Wong SW 21.0
stake in the consortium, to make further provision. KWAP 7.2
♦ RM2bn new orderbook guidance stands. WCT is keeping to its RM2bn
FYE Dec FY10 FY11 FY12
new orderbook guidance in FY12/10, despite having only secured one EPS Revision (%) - - -
project amounting to RM110m YTD. WCT did not give specific guidance as Var to Cons (%) -9 -23 -21
to the contracts it is confident about securing but it did mention that it is
bidding “aggressively” for certain “local contracts awarded out on an open PE Band Chart
tender basis” and overseas infrastructure jobs in Qatar and Abu Dhabi.
PER = 19x
♦ Construction margins of 5-7%. WCT is guiding for construction margins PER = 15x
PER = 11x
of 5-7% going forward, underpinned largely by local jobs that generally PER = 7x
carry lower risks vis-à-vis overseas projects. At present, the percentage
breakdown between local and overseas jobs in terms of value of WCT’s
outstanding external construction orderbook is 69% and 31%.
♦ Forecasts. Maintained.
Relative Performance To FBM KLCI
♦ Risks to our view. The risks include: (1) New contracts secured in
FY12/10-12 coming in above our target of RM1.5bn per annum; and (2)
Better-than-expected construction margins.
WCT
♦ We are now more upbeat on the construction sector. This is
prompted largely by investors’ improving risk appetite for construction
stocks following: (1) The massive underperformance of the sector vis-à-vis FBM KLCI
the market in 4Q2009 and 1Q2010; and (2) A better sector news flow and
new expectations leading up to the announcement of the 10th Malaysia Plan
(10MP) in June 2010.
♦ Maintain Underperform. However, upside in WCT’s share price is capped
Joshua CY Ng
by rich valuations. Indicative fair value is RM2.10 based on 12x fully- (603) 92802151
diluted FY12/10 EPS of 17.5sen, in line with our benchmark 1-year forward joshuang@rhb.com.my
target PER of 10-14x for the construction sector.

Please read important disclosures at the end of this report.

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 25 May 2010

No Further Provision From Bakun

♦ Highlights. Key takeaways from WCT analysts’ briefing on 24 May 2010 are:
1. WCT does not see the need to make further provision for the Bakun project.
2. WCT is keeping to its RM2bn new orderbook guidance in FY12/10, despite having only secured RM110m YTD;
and
3. WCT is guiding for 5-7% construction margins going forward, underpinned largely by local jobs.

♦ No further provision for Bakun. WCT does not see the need to make further provision for cost-overrun from the
RM1.8bn CW2 Package of the Bakun Hydroelectric Project (Bakun). To recap, the possibility of another round of
provision arose after Sime Darby, the lead member (with a 35.7% stake) of Malaysia-China Hydro Joint Venture,
the consortium that was awarded the contract in 2002, said that there could be a potential additional cost
attributable to it of RM450m. This meant to say that there may be an additional RM1.26bn cost overrun incurred at
the consortium level, and WCT, given its 7.7% stake in the consortium, may have to provide for RM97m,
translating to 12.4sen/share.

♦ It is believed that the additional RM450m provided by Sime Darby was to cover “costs sitting in Sime Darby’s books
that it was unable to charge to the consortium”. This means that there is no additional cost-overrun at the
consortium level after all, and hence there is no need for WCT to make further provision. Lending further support
to this argument is, based on the consortium’s audited accounts as at 30 Jun 2009, the total losses from the
contract were at about RM368m that were already fully provided in 2004 (Sime Darby and WCT each provided
RM132m and RM28m based on their 35.7% and 7.7% stakes in the consortium respectively). Interestingly, it is
believed that the RM368m losses arose despite a variation order amounting to RM708m being granted to the
consortium then. It is believed that there was a meeting of the consortium members last Friday. The meeting
failed to shed light on why Sime Darby decided to make the RM450m additional provision as “certain attendees
were too emotionally charged to allow the meeting to be conducted in an orderly fashion”.

♦ RM2bn new orderbook guidance stands. WCT is keeping to its RM2bn new orderbook guidance in FY12/10,
despite having only secured one project amounting to RM110m YTD, namely, a 50% share of Bahraini Dinar 24m
(RM220m) additional fit-out works for Bahrain City Centre hotels. WCT did not give specific guidance as to the
contracts it is confident about securing but it did mention that it is bidding “aggressively” for certain “local contracts
awarded out on an open tender basis” and overseas infrastructure jobs in Qatar and Abu Dhabi. In FY12/09, WCT
secured RM1.9bn worth of new jobs. In our earnings forecasts, we assume annual new orderbook targets of
RM1.5bn in FY12/10-12.

♦ Construction margins of 5-7%. WCT is guiding for construction margins of 5-7% going forward, underpinned
largely by local jobs that generally carry lower risks vis-à-vis overseas projects. At present, the percentage
breakdown between local and overseas jobs in terms of value of WCT’s outstanding external construction orderbook
is 69% and 31%. Also, WCT acknowledged that the high construction EBIT margin (adjusted for inter-company
elimination) of 12% (see Chart 1) in 1QFY12/10 is non-recurring as it was inflated by lumpy profits from the newly
completed Abu Dhabi F1 Circuit project. In our earnings forecasts, we assume blended construction EBIT margins
of 6.1%, 6.7% and 8% in FY12/10-12.

♦ Forecasts. Maintained.

♦ Risks to our view. The risks include: (1) New contracts secured in FY12/10-12 coming in above our target of
RM1.5bn per annum; and (2) Better-than-expected construction margins.

♦ We are now more upbeat on the construction sector. This is prompted largely by investors’ improving risk
appetite for construction stocks following: (1) The massive underperformance of the sector vis-à-vis the market in
4Q2009 and 1Q2010; and (2) A better sector news flow and new expectations leading up to the announcement of
the 10th Malaysia Plan (10MP) in June 2010. These are, to a certain extent, offset by negative elements such as:
(1) The still slow pace of the roll-out of public projects, shrinking margins and declining dominance of established
players in large-scale projects locally; and (2) The not-so-rosy outlook and increased operating risks in key
overseas markets (following the Dubai credit crisis, Dong’s devaluation and rising arbitration cases).

♦ Maintain Underperform. However, upside in WCT’s share price is capped by rich valuations. Indicative fair value
is RM2.10 based on 12x fully-diluted FY12/10 EPS of 17.5sen, in line with our benchmark 1-year forward target PER
of 10-14x for the construction sector.

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 25 May 2010

C ha rt 1: C o ns t ruc t io n E B IT M a rgin*

15%

10%

5%

0%
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10

-5%

-10%

*Adjusted for inter-company elimination

Source: Bursa Malaysia

Table 2: Outstanding Construction Orderbook

Project Outstanding Value
(RMm)
Overseas
New Doha International Airport, Qatar 321
Hotel fit-out works at Bahrain City Centre 302
Others 35
658

Local
The Paradigm and other internal jobs 705
Infrastructure works at Iskandar Malaysia 617
Various building jobs in Putrajaya 301
New permanent LCCT at KLIA, Earthwork Package 1 265
Bakun dam access roads 84
Kota Kinabalu International Airport 42
Universiti Teknologi Mara Campus in Kuala Selangor 36
AEON mall in Melaka 28
Others 72
2,150
Total 2,808
Source: Company, RHBRI

Table 3: Earnings Forecasts Table 4: Forecast Assumptions

FYE Dec (RMm) FY09a FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F

Turnover 4,666.6 2,436.2 2,020.9 1,747.5 Construction EBIT margin (%) 6.1 6.7 8.0
Turnover growth (%) New orderbook secured 1.5 1.5 1.5
25.7 -47.8 -17.0 -13.5 (RMbn)

EBITDA 254.1 214.5 201.0 202.0

EBITDA margin (%) 5.4 8.8 9.9 11.6

Depreciation -10.0 -10.0 -10.0 -10.0

Net Interest -50.3 -42.6 -40.7 -39.1
Associates 17.2 10.0 10.0 10.0
EI 0.0 0.0 0.0 0.0

Pretax Profit 211.1 171.9 160.3 162.9

Tax 4.8 -31.3 -29.6 -28.7
PAT 215.9 140.6 130.7 134.2
Minorities -68.8 0.0 0.0 0.0
Net Profit 147.1 140.6 130.7 134.2
Source: Company data, RHBRI estimates

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 25 May 2010

IMPORTANT DISCLOSURES

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Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more over
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Industry/Sector Ratings

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Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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